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Thursday, December 22, 2005

CEO GREED: Have we had enough yet?

Lee Drutman is the author of The Peoples Business: Controlling Corporations and Restoring Democracy.

Despite growing frustration over the last few years by institutional investors, shareholders, and the general public, pay ratios remain desperately out of whack. At the 367 biggest companies last year, average CEO take-home pay was $11.8 million. Average worker pay, meanwhile, was a mere $27,460. And earlier this month, SEC Chairman Christopher Cox was out promising that come 2006, his agency was going to do something about runaway CEO pay.

So, is this a generous holiday season gift to those who have for years been clamoring that CEOs are getting paid too much? Or is it merely one of those presents that is useless without the appropriate matching giftskind of like getting an Xbox game cartridge without the Xbox system that you need to play the cartridge?

Cox said the SEC is going to start requiring companies to be clear and upfront about what they are actually paying their CEOs, instead of hiding a thousand and one different perks in a thousand and one different placesa corporate jet here, a country club membership there, a ridiculous retirement Shangri-la there.

"Today's regulatory regime permits obfuscation or worse when it comes to executive compensation," Cox told Bloomberg News. "The notorious abuses, such as never-before-disclosed exit payments, are the byproduct of this leaky regime." Additionally, Cox told the Los Angeles Times : "It is absolutely a top priority for early '06 It's important to get clear informationboth to investors and to the directors that represent them."

Cox says he wants to give shareholders comparable executive-to-executive and company-to-company numbers so they can discipline corporate boards who approve mammoth compensation. No doubt, adequate disclosure of pay packages is sorely lacking at many companies and thus an obvious first step. But a bigger question remains: even if they have that information, how exactly will shareholders go about disciplining corporate boards?

I ask, because at almost all U.S. companies, shareholders have about zero say into who sits on the board of directors and how executive pay is set. The directors are typically nominated by management, and shareholders are given one and only one slate of directors to choose froma Soviet-style election that guarantees that managers always get their trusted friends on the board of directors. This actually goes a long way to explaining why executive pay packages continue to defy the laws of gravity (and common sense). After all, whats a few million among friends?

Unfortunately, Cox has demonstrated no interest in injecting even a modicum of accountability into the process by making it easier for minority shareholders to nominate candidates to the board of directors, something his predecessor, William Donaldson, unsuccessfully pushed for. (The Chamber of Commerce and other business groups vehemently opposed any suggestion of this proxy access reform, effectively killing the proposal.)

The problem here is that without giving shareholders some means of holding directors directly accountable, its not clear how else to bring pay packages under control. Shame clearly hasnt worked. And somehow, it doesnt strike me as convincing that if only directors had better information, they would be more diligent about pay packages (its not clear that there are many directors out there who are being kept in the dark about these things against their will).

Yet, there is some reason for hope. We may finally be reaching a critical mass of big institutional investors who are legitimately concerned about runaway CEO payperhaps enough to effect some change.

After all, bemoaning runaway executive pay is not just for cranky Grinches anymore. Its also for Florida Governor Jeb Bush, who just last week announced that he was sick of outrageous executive compensation and undemocratic proxy voting and that Floridas state pension fund was going to start using its $116 billion in assets to push for better corporate governance. The one that angers me the most is the lack of tying of executive compensation to results, Gov. Bush said. I think the shareholders and the retirees that rely on the pension are equally outraged as I am and it's appropriate for us to vote our shares and for us to say we want pay be tied to results. It's just that simple.

Recently, the largest U.S. manager of retirement funds, for university and college employees with $360 billion in assets, TIAA-CREF, also denounced high CEO pay. `There's a burden on the board of directors to justify its compensation choices and explain them, so that shareholders can be confident that these are the right decisions,'' said John Wilcox, TIAA-CREFs senior vice president.

Even a whopping majority90 percentof institutional investors think that corporate executives are overpaid, according to a recent Watson Wyatt survey. And the 85 percent who think that these excessive payments are hurting corporate Americas image (according to the same survey). And the 10 pension funds from the U.S., Canada and Europe (which represent a combined $1 trillion in assets) recently sent a confidential letter to the SEC, urging the agency to look more closely at how executive pay is being set at big companies.

But will that be enough?

After all, while CEOs continue to receive double-digit percentage raises year after year, workers barely keep pace with inflation. At 431-to-1, the U.S. ratio of CEO to worker pay is an anomaly among industrialized nations, where a more typical ratio is 25-to-1. Meanwhile, the percentage of company profits going to the top five executives more than doubled between 1993 and 2003, growing from 4.8 percent to 10.3 percent.

Yet, with each passing outrage, it seems that we are getting closer and closer to a critical mass of influential and respected investors who are completely fed up. When that moment comes, it is hard to say.

More disclosure can help bring us closer by highlighting more abuses. But when we are finally at that critical moment where enough major investors want to do something about excessive pay, they are still going to need the tools to do sobe it more say in selecting directors, the ability to vote directly on executive pay packages, or both. If Cox is serious about disclosure, great. More information is always helpful. But without also giving the shareholders the tools to actually use this information, disclosure alone may not be such a generous gift for reform after all.